Duluth Holdings Inc. — Q1 Fiscal 2024 10-Q
Reporting period: 13 weeks ended April 28, 2024; comparable period ended April 30, 2023. Duluth sells men’s and women’s apparel, workwear and accessories through its omnichannel platform. At quarter-end, it operated 62 retail stores and three outlet stores.
Financial performance
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Net sales | $116.7 million | $123.8 million |
| Gross profit / margin | $61.6 million / 52.8% | $65.7 million / 53.0% |
| SG&A | $70.6 million (60.5% of sales) | $70.2 million (56.7% of sales) |
| Operating loss | $9.0 million | $4.5 million |
| Net loss | $7.9 million | $3.9 million |
| Adjusted EBITDA | $1.8 million (1.6% of sales) | $5.3 million (4.3% of sales) |
| Operating cash flow | $(33.7) million | $(14.0) million |
Basic and diluted loss per share were both $0.24, versus $0.12 in the prior-year quarter. Direct-to-consumer sales were $75.4 million and store sales were $41.2 million. Gross margin eased slightly, while the higher SG&A ratio and operating loss reflected lower sales against relatively fixed costs.
Liquidity, debt and cash flow
Cash and cash equivalents were $6.8 million at April 28, down from $32.2 million at January 28. Working capital was $75.9 million. Operating cash use was driven principally by a $10.7 million inventory increase and a $13.2 million decrease in trade accounts payable. Investing cash use was $1.5 million, compared with $21.3 million a year earlier. Financing provided $9.8 million, including $11.0 million of net revolving-credit borrowings.
The company had $11.0 million outstanding on its revolving line of credit. Consolidated TRI long-term debt was $25.8 million; the filing says Duluth is not the guarantor or obligor of TRI’s notes. Operating and finance lease liabilities were $118.8 million and $36.7 million, respectively. Duluth reported compliance with its credit agreement covenants. Its revolving facility has a $200 million commitment and matures July 8, 2027.
Changes, outlook and risks
- Sales declined 5.7%; management cited challenging traffic and a lower in-stock position at the start of the quarter. Store-market sales fell 8.6% and non-store-market sales fell 10.2%.
- Management said new-product costs were better than expected, but gross-margin improvement is delayed while the company sells through older, higher-cost inventory. Higher fixed costs and depreciation from strategic investments increased SG&A; logistics and fulfillment efficiencies partly offset the increase.
- The company expects approximately $25 million of fiscal 2024 capital expenditures, including software-hosting implementation costs, primarily for logistics optimization, fulfillment-network and IT investments. Management believes operating cash flow and credit-facility availability will cover working capital and anticipated capital expenditures for the foreseeable future. No numeric sales or earnings guidance is provided in the filing.
- Management cited inflation, economic uncertainty and potential effects on traffic and consumer demand; apparel seasonality also means a significant share of revenue and operating profit is historically generated in the fourth quarter.
- Disclosure controls were deemed ineffective because of an unremediated material weakness in financial-reporting controls over mapping general-ledger accounts to financial statements. Management described remediation work underway and said the weakness is not fully remediated until controls operate effectively and are tested. Management nevertheless concluded the interim financial statements fairly present the company’s results.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and no impairment triggers identified during the quarter.
Investor verification priorities
- Track whether sales and traffic stabilize and whether the lower opening-quarter in-stock position is resolved.
- Check inventory levels, sell-through of older-cost product and subsequent gross-margin performance.
- Monitor cash generation, working-capital movements, revolver borrowings and liquidity through seasonal fluctuations.
- Assess delivery and returns on planned capital spending, particularly logistics and IT investments.
- Review subsequent disclosures on remediation and testing of the material weakness in internal controls.